Managerial Accounting: Case 11-55 Jasmin-Olga Chocolate Cookies bakes cookies for retail stores

Managerial Accounting  
Case 11-55
Jasmin-Olga Chocolate Cookies bakes cookies for retail stores. The company’s best-selling cookie is chocolate nut supreme, which is marketed as a gourmet cookie and regularly sells for $9 per pound. The standard cost per pound of chocolate nut supreme, based on Jasmin-Olga’s normal monthly production of 510,000 pounds, is as follows:  
Cost Item  Quantity   Standard Unit Cost  Total Cost   Direct materials:      Cookie mix  9   oz.   0.02  per oz.  0.18       Milk chocolate  5   oz.   0.14  per oz.  0.70       Almonds  1   oz.   0.50  per oz.  0.50   1.38    Direct labor:*      Mixing  1   min   11.40  per hr.  0.19       Baking  2   min.   18.00  per hr.  0.60                                              0.79       Variable overhead†  3   min   29.40  per hr.  1.47       
Total standard cost per pound  3.64   
*Direct-labor rates include employee benefits.
†Applied on the basis of direct-labor hours.   

Jasmin-Olga’s management accountant, Dinesh, prepares monthly budget reports based on these standard costs. April’s contribution report, which compares budgeted and actual performance, is shown in the following schedule.
Contribution Report for April  
Static Budget   Actual                      Variance   
Units (in pounds)  510,000   573,750   63,750   F   
Revenue  4,590,000   5,106,375   516,375   F   
Direct material  703,800   1,102,875   399,075   U   
Direct labor  402,900   423,262   20,362   U   
Variable overhead  749,700   956,250   206,550   U       
Total variable costs  1,856,400   2,482,387   625,987   U   
Contribution margin  2,733,600   2,623,988   109,612   U    
Rocco and Juliana co-presidents of the company, are disappointed with the results. Despite a sizable increase in the number of cookies sold, the products expected contribution to the overall profitability of the firm decreased. Rocco and Juliana have asked Dinesh to identify the reason why the contribution margin decreased. Dinesh has gathered the following information to help in his analysis of the decrease.
Usage Report for April  
Cost Item  Quantity   Actual Cost   
Direct materials:      
Cookie mix  5,928,750   oz.   118,575       
Milk chocolate  3,391,500   oz.   678,300     
 Almonds  612,000   oz.   306,000   
Direct labor:      
Mixing  573,750   min.   109,012       
Baking  1,047,500   min.   314,250   
Variable overhead  956,250       
Total variable costs  2,482,387   

Management’s Questions:
1.     Prepare a new contribution report for April, in which:
a. The static budget column in the contribution report is replaced with a flexible budget column. (20 pts)
b. The variances in the contribution report are recomputed as the difference between the flexible budget and actual columns. (15 pts)
2.     What is the total contribution margin in the flexible budget column of the new report prepared for requirement (1) (15 pts)?
3.     Explain (i.e., interpret) the meaning of the total contribution margin in the flexible budget column of the new report prepared for requirement (1). (20 pts)
4.     What is the total variance between the flexible budget contribution margin and the actual contribution margin in the new report prepared for requirement (1)? Explain this total contribution margin variance by computing the following variances. (Assume that all materials are used in the month of purchase.)
a. Direct-material price variance. (5 pts)
b. Direct-material quantity variance. (5 pts)
c. Direct-labor rate variance. (5 pts)
d. Direct-labor efficiency variance. (5 pts)
e. Variable-overhead spending variance. (5 pts)
f. Variable-overhead efficiency variance. (5 pts)
g. Sales-price variance. (5 pts)
5.  a. Explain the problems that might arise in using direct-labor hours as the basis for applying overhead. (30 pts)    
b. How might activity-based costing (ABC) solve the problems described in requirement (5a)? (30 pts)
6.     Argue for the use of Activity-based Costing by in this case by:
a. Describe when Activity-based Costing is appropriate and when Traditional Costing is appropriate and when each is not appropriate to use. (20 pts)
b. Discuss what are the strengths and weaknesses of ABC? When is it appropriate to use? What kinds of business situations suggest the need for ABC? (20 pts)
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